Online sales: A brave new world for the UK direct selling industry?

A key factor to be considered in answering this existential question is the role of competition law (or what some call anti-trust laws). The UK and the EU have long regulated what are known as ‘vertical agreements’ which are basically arrangements between suppliers and their distributors. Where the restrictions imposed by a supplier upon its distributors are viewed as distorting competition in the market then those anti-competitive restrictions may well be unlawful. So a direct selling company which seeks to impose restrictions on its direct sellers as to how those direct sellers may market and sell its products online, in order to seek to preserve the personal relationships underpinning the direct selling business model, may find that those restrictions (or ‘vertical restraints’ as they are technically termed) are unenforceable and unlawful.

To take a simple example: can a direct seller market and sell the company’s products on eBay? No personal relationships there; anyone who comes onto the site and clicks to buy can get the product and then be on their way.

The European Commission has previously sought to answer questions of this nature through the Vertical Agreements Block Exemption Regulation (VBER) and a set of related Vertical Restraints Guidelines. VBER provides a form of combined economic and legal blueprint so that basically if a supplier falls within the relevant 30% market share threshold and does not impose any ‘hardcore restrictions’ or excluded restrictions on its distributors as described in VBER then its distributor agreements should be lawful and its restrictions enforceable. The Vertical Restraints Guidelines explain VBER in more detail particularly in relation to what is, and what is not, a hardcore restriction.

This all sounds fine in theory, but in practice what are hardcore restrictions or otherwise anti-competitive practices has baffled and frustrated suppliers, including direct selling companies, since the current VBER was introduced in 2010.

There are two key developments in relation to VBER that direct selling companies should be aware of:

1. The European Commission has been reviewing VBER and the Vertical Restraints Guidelines since October 2018 and is now close to finalising a new updated VBER. It ran an evaluation exercise and a consultation (to which SELDIA amongst others contributed) in 2020, and on 9^th July 2021 it published its revised draft VBER and revised draft Vertical Restraints Guidelines for consultation. The consultation runs until 17 September, so just a couple of months, and the new VBER and Vertical Restraints Guidelines are intended to be in effect by 31 May 2022 when the current VBER expires.
2. Since ‘Brexit’ at the end of 2020 the UK has had its own competition rules but, because the UK preserved those EU laws applicable to the UK at that time by incorporating them into its domestic law, those rules effectively amount to a parallel competition law regime to the EU and this includes both VBER and the status of the Vertical Restraints Guidelines. The UK’s regulator, the Competition & Markets Authority (CMA) is therefore presently conducting its own review of VBER and the Vertical Restraints Guidelines with a view to a new UK Vertical Agreements Block Exemption Order (VABEO) being in place by 31 May 2022 and, to that end, held ‘stakeholder roundtables’ in Spring 2021, and is running a consultation on its recommendations from 17 June to 22 July 2021. The CMA’s recommendations are due to be published in Autumn 2021.

Direct selling companies are advised to monitor the progress of both the EU and UK VBER reviews and, in particular, to be alert to any relevant divergences between the two. The CMA has noted that it has drawn on the European Commission’s own VBER review and consultation which, combined with its comment that alignment with the EU is likely to reduce compliance costs, suggests that material divergence is unlikely, but the CMA has also said that it wishes to produce rules ‘tailored to the needs of business operating in the UK and UK consumers” and, in particular, there are three elements of VBER to which the CMA is devoting some attention which will be of interest to the direct selling industry:

• Online Sales: The CMA proposes that neither (i) dual pricing, nor (ii) the imposition of criteria for online sales that are not overall equivalent to the criteria imposed on bricks-and-mortar shops in a selective distribution system, should be regarded as hardcore restrictions. The CMA seems to have accepted the view of many respondents to its review that, in the context of a selective distribution system, it is necessary to provide offline distributors with the necessary incentives to invest in promoting products and to prevent free-riding by online distributors who focus mainly on price without offering comparable pre-sales services. The CMA’s review also found that costs incurred by offline distributors are significantly higher than the costs for online distributors. Dual pricing was viewed by certain stakeholders as a potentially efficient tool to address free-riding. The CMA’s provisional view seems to be that retaining the status quo would not be appropriate because of market developments such as the exponential growth of online sales and the existence of sufficient safeguards against outright online sales bans as illustrated by case law (for example, the ‘Ping’ case 2015-2020).
• ‘Active’ and ‘Passive’ Sales: The current general rule is that a distributor should be able to respond to unsolicited requests from individual customers (‘passive’ sales) and accordingly restrictions on such sales are not block exempted, whilst restrictions on ‘active’ sales are only block exempted in limited  circumstances for example sales into a territory granted to an exclusive distributor to protect that exclusive distributor’s investments or to protect members of a selective distribution system by preventing sales being made to unauthorised distributors located in the same territory. The CMA’s provisional view is that the current approach, which considers that some online sales strategies should be regarded as passive sales, whereas others should be regarded as active sales, remains an appropriate distinction, but that the significant developments in e-commerce in recent years might make it appropriate to redraw the boundary between the two and it proposes that definitions of active sales and passive sales are included in the UK VBER with an explanation about the practical interpretation of these terms in the Guidance.
• Distribution Systems: The CMA proposes that the list of exceptions to the hardcore restrictions should be revised to provide greater protection for members of selective distribution systems against sales from outside the territory to unauthorised distributors inside that territory.

The CMA’s review can be tracked here: Retained Vertical Agreements Block Exemption Regulation – GOV.UK (www.gov.uk)
The EC’s review can be tracked here: 2018 vber (europa.eu)

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